Scudder Pennsylvania Tax Free Fund Annual Report March 31, 1999 No-Load Funds For investors seeking double-tax-free income exempt from both Pennsylvania and regular federal income taxes. A no-load fund with no commissions to buy, sell, or exchange shares. SCUDDER Scudder Pennsylvania Tax Free Fund - -------------------------------------------------------------------------------- Date of Inception: 5/28/87 Total Net Assets as of Ticker Symbol: SCPAX 3/31/99: $85.4 million - -------------------------------------------------------------------------------- - - For its most recent annual period ended March 31, 1999, Scudder Pennsylvania Tax Free Fund posted a total return of 4.78%, compared with the 4.66% average return of 62 similar funds tracked by Lipper Analytical Services. - - As of March 31, 1999, Scudder Pennsylvania Tax Free Fund's 30-day net annualized SEC yield was 3.93%, equivalent to a 6.69% taxable yield for Pennsylvania investors subject to the 41.29% combined federal and state income tax rate. - - Scudder Pennsylvania Tax Free Fund received an overall Morningstar Ratingt of four stars out of 1578 tax free funds as of March 31, 1999.* - ----------------------------------------- 30-Day Yield on March 31, 1999 - ----------------------------------------- THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE LINE CHART DATA: Scudder Taxable Yield Pennsylvania Needed to Equal Tax Free Fund the Fund's Yield - ----------------------------------------- 3.93% 6.69% - ----------------------------------------- Table of Contents 3 Letter from the Fund's President 17 Notes to Financial Statements 4 Performance Update 20 Report of Independent Accountants 5 Portfolio Summary 21 Tax Information 6 Portfolio Management Discussion 22 Shareholder Meeting Results 9 Glossary of Investment Terms 24 Officers and Trustees 10 Investment Portfolio 25 Investment Products and Services 13 Financial Statements 26 Scudder Solutions 16 Financial Highlights * Morningstar proprietary ratings reflect risk-adjusted performance as of March 31, 1999. The ratings are subject to change every month. Past performance is no guarantee of future results. Morningstar ratings are calculated from the Fund's three-, five-, and ten-year average annual returns in excess of 90-day Treasury bill returns with appropriate fee adjustments, and a risk factor that reflects fund performance below T-bill returns. The Fund received four stars for the three- and five-year periods, and three stars for the ten-year period. The top 10% of funds in a broad asset class receive 5 stars, the next 22.5% receive 4 stars, and the next 35% receive 3 stars. The Fund was rated among 1578, 1131, and 368 municipal funds for the three-, five-, and ten-year periods, respectively. 2 - Scudder Pennsylvania Tax Free Fund Letter from the Fund's President Dear Shareholders, We are pleased to report the results of Scudder Pennsylvania Tax Free Fund's most recent fiscal year. The Fund's total return for the 12-month period ended March 31, 1999, was 4.78%. The Fund has displayed solid long-term performance, and recently received a four-star rating from Morningstar (please see page 2 for additional information concerning this rating). The Fund's Board of Trustees has voted to merge Scudder Pennsylvania Tax Free Fund's assets into Scudder Managed Municipal Bonds in a tax-free reorganization. The Board believes this action is in the best long-term interest of Fund shareholders. You will have the opportunity to vote on this decision via proxy material that will be distributed to you. This material describes the proposed transaction and its benefits. Please be sure to vote your proxy and return it before the shareholder meeting which is scheduled for September 2, 1999. For those of you interested in new Scudder products, we are pleased to introduce Scudder Select 500 Fund and Scudder Select 1000 Growth Fund. Both funds are managed with the goal of pursuing long-term outperformance compared to their benchmark indices, the S&P 500 Index and the Russell 1000 Growth Index, respectively. For more information on either Select fund, please call us at the number below. Please call a Scudder Investor Information representative at 1-800-225-2470 if you have questions about your Fund. Or visit our Web site at www.scudder.com. Thank you for choosing Scudder Pennsylvania Tax Free Fund to help meet your investment needs. Sincerely, /s/Daniel Pierce Daniel Pierce President, Scudder Pennsylvania Tax Free Fund 3 - Scudder Pennsylvania Tax Free Fund Performance Update as of March 31, 1999 ----------------------------------------- Fund Index Comparison ----------------------------------------- Total Return ----------------------------------------- Period Growth Ended of Average 3/31/1999 $10,000 Cumulative Annual ----------------------------------------- Scudder Pennsylvania Tax Free Fund ----------------------------------------- 1 Year $10,478 4.78% 4.78% 5 Year $13,976 39.76% 6.92% 10 Year $21,040 110.40% 7.72% ----------------------------------------- ----------------------------------------- Lehman Brothers Municipal Bond Index ----------------------------------------- 1 Year $10,620 6.20% 6.20% 5 Year $14,440 44.40% 7.62% 10 Year $22,083 120.83% 8.24% ----------------------------------------- ----------------------------------------- Growth of a $10,000 Investment ----------------------------------------- THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE LINE CHART DATA: Yearly periods ended March 31 Lehman Brothers Scudder Pennsylvania Municipal Bond Index Tax Free Fund -------------------- ------------- 89 10000 10000 90 11056 10875 91 12075 11700 92 13283 12952 93 14947 14660 94 15293 15055 95 16430 16123 96 17807 17325 97 18779 18244 98 20793 20082 99 22083 21041 The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted measure of municipal bonds issued across the United States. Index issues have a credit rating of at least Baa and a maturity of at least two years. Index returns assume reinvestment of dividends and, unlike Fund returns, do not reflect any fees or expenses. - ----------------------------------------- Returns and Per Share Information - ----------------------------------------- Yearly Periods Ended March 31 THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE ILLUSTRATING THE FUND TOTAL RETURN (%) AND INDEX TOTAL RETURN (%) CHART DATA: CHART DATA: Yearly periods ended March 31 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 - ----------------------------------------------------------------------------------------------------------------------------- Net Asset Value $ 12.27 $ 12.35 $ 12.80 $ 13.46 $ 13.01 $ 13.13 $ 13.31 $ 13.27 $ 13.85 $ 13.66 - ----------------------------------------------------------------------------------------------------------------------------- Income Dividends $ .84 $ .82 $ .77 $ .76 $ .75 $ .73 $ .71 $ .71 $ .70 $ .65 - ----------------------------------------------------------------------------------------------------------------------------- Capital Gains Distributions $ .01 $ - $ .07 $ .21 $ .09 $ .03 $ .07 $ .02 $ .03 $ .19 - ----------------------------------------------------------------------------------------------------------------------------- Fund Total Return (%) 8.75 7.58 10.70 13.19 2.70 7.09 7.45 5.30 10.08 4.78 - ----------------------------------------------------------------------------------------------------------------------------- Index Total Return (%) 10.56 9.22 10.02 12.52 2.32 7.43 8.38 5.45 10.73 6.20 - ----------------------------------------------------------------------------------------------------------------------------- All performance is historical and assumes reinvestment of all dividends and capital gains and is not indicative of future results. Investment return and principal value will fluctuate, so an investor's shares, when redeemed, may be worth more or less than when purchased. If the Adviser had not maintained the Fund's expenses, total returns for the Fund would have been lower. 4 - Scudder Pennsylvania Tax Free Fund Portfolio Summary as of March 31, 1999 - -------------------------- Diversification - -------------------------- A graph in the form of a pie chart appears here, illustrating the exact data points in the table below. Hospital/Health 21% Water/Sewer Revenue 11% Sales/Special Tax 9% State General Obligation/Lease 8% Higher Education 8% Cities General Obligation/Lease 8% County General Obligation/Lease 7% Port/Airport Revenue 7% School Districts 5% Miscellaneous Municipal 16% ----------------------------------------- 100% ----------------------------------------- During its most recent fiscal year, the Fund was invested in a broad selection of Pennsylvania municipal bonds. - -------------------------- Quality - -------------------------- A graph in the form of a pie chart appears here, illustrating the exact data points in the table below. AAA* 82% AA 7% A 3% BBB 3% SKI 5% --------------------------- 100% --------------------------- Weighted average quality: AAA * Category includes cash equivalents Overall portfolio quality remains high, with over 90% of portfolio securities rated A or better as of March 31. - -------------------------- Effective Maturity - -------------------------- A graph in the form of a pie chart appears here, illustrating the exact data points in the table below. Less than 1 year 3% 1-5 years 25% 5-10 years 22% 10-15 years 41% 15 years or greater 9% ----------------------------- 100% ----------------------------- Weighted average effective maturity: 9.21 years Our continuing goal has been to maintain an average effective maturity similar to that of the Lehman Brothers Municipal Bond Index, the Fund's benchmark, but with a superior, call-protected structure. For more complete details about the Fund's investment portfolio, see page. A quarterly Fund Summary and Portfolio Holdings are available upon request. 5 - Scudder Pennsylvania Tax Free Fund Portfolio Management Discussion Dear Shareholders, Following a series of overseas and domestic financial crises that prompted uncertainty, volatility, and a "flight to quality," bond yields plummeted, then returned to July 1998 levels at the close of Scudder Pennsylvania Tax Free Fund's most recent fiscal year. During the 12-month period ended March 31, 1999, the Fund returned 4.78%, outpacing the 4.66% average return of Pennsylvania tax-exempt funds as tracked by Lipper Analytical Services, Inc. As of March 31, 1999, Scudder Pennsylvania Tax Free Fund's 30-day net annualized SEC yield was 3.93%, equivalent to a 6.69% taxable yield for Pennsylvania investors subject to the 41.29% combined federal and state income tax rate. Pennsylvania Update Economic growth in the Commonwealth of Pennsylvania continues to foster record employment and expanding financial reserves, despite the fact that the Commonwealth's growth rate is below the national average. Pennsylvania is expecting to finish its 1999 fiscal year with a seventh consecutive General Fund operating surplus. The Governor is undecided on how this surplus will be spent, although he has indicated his desire to transfer a large portion of the surplus to the Commonwealth's Rainy Day Fund. Job growth in the service and trade sectors led the Commonwealth to a 1% increase in employment in 1998. Pennsylvania's average unemployment rate in 1998 was 4.6%, compared with the national average of 4.5%. Pennsylvania has a low debt burden. For its 2000 through 2003 fiscal years, the Commonwealth is projecting to increase annual debt issuance from $600 million to $900 million. The $300 million increase in annual debt issuance represents increased spending for redevelopment assistance and should have a minor impact on the Commonwealth's $5 billion in outstanding debt. Overall, the Commonwealth is benefiting from a favorable economy that has led to improved finances. A Market Roller Coaster Market turmoil hit a peak in the wake of the Russian currency devaluation on August 17, followed by the near collapse of the Long Term Capital Management hedge fund. Volatility in the U.S. stock market increased greatly while a massive reallocation to U.S. Treasury bonds led to substantially lower yields. Though presidential impeachment proceedings distracted the financial markets through the fall and beyond, the Federal Reserve's three consecutive interest rate cuts in September, October, and November helped to gradually restore market stability. During this period, the U.S. economy continued to grow beyond all expectations, recording a dramatic 6% annualized increase in GDP for the fourth quarter of 1998. This show of strength, in turn, worried bond investors, who responded by sending 30-year Treasury bond yields back up to July 1998 levels. Over the Fund's most recent fiscal year, yields of 30-year Treasury bonds ended slightly lower, beginning the period at 5.84% and ending it at 5.67%. Over the same time frame, yields of 30-year AAA insured municipal bonds declined from 5.10% to 5.05%. 6 - Scudder Pennsylvania Tax Free Fund THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE CHART TITLE: - ------------------------------------------------------- Municipals Provided Greater Stability Monthly prices of 30-year AAA-rated municipal bonds compared with prices of 30-year U.S. Treasury Bonds, 3/31/98-3/31/99 - ------------------------------------------------------- CHART DATA: 30-year U.S. Treasury Bonds 30-year AAA-rated municipal bonds --------------------------- --------------------------------- 3/31/98 100.00 100.00 98.47 98.49 5/31/98 100.14 100.77 103.47 100.00 7/31/98 101.57 100.00 107.12 102.33 9/30/98 114.87 105.57 111.47 102.33 11/30/98 109.83 102.33 111.47 102.33 1/31/99 111.14 103.13 103.32 101.55 3/31/99 102.11 100.77 Source: Scudder Kemper Investments, Inc. In addition to high tax-free yields, municipal bonds have historically offered greater price stability over time than Treasury bonds of comparable maturity. The accompanying chart demonstrates the record over the past 12 months, when most financial markets were at a peak of volatility. Emphasizing High Coupon Bonds Over the past 12 months, Scudder Pennsylvania Tax Free Fund pursued a two-part strategy: First, the Fund emphasized premium "cushion" bonds -- bonds with high coupons that compensate investors for the fact that they can be redeemed by their issuer in a relatively short period of time. Second, the Fund continues to hold a substantial position in noncallable bonds (52% of assets) to provide a relatively stable income stream along with long-term price appreciation potential. In terms of maturity, we focused on 13- to 15- year bonds, because we believe they offer the best total return potential, based on our outlook for interest rates and the yield differentials among bonds across the maturity spectrum. Lastly, our continuing goal is to have an average duration similar to that of the Lehman Brothers Municipal Bond Index, but with a superior, call-protected structure. As of March 31, the Fund's average duration was 7.24 years. (Duration gives relative weight to both principal and interest payments through the life of a bond and has replaced average maturity as the standard measure of interest rate sensitivity among professional investors. Generally, the shorter the duration, the less sensitive a portfolio will be to changes in interest rates.) Overall portfolio quality remains high, with over 90% of portfolio securities rated A or better at the close of the period. We continue to invest in a broad selection of Pennsylvania tax-exempt issues, including hospital/health, water/sewer revenue, and sales/special tax bonds. During the period, the Fund reduced its allocation in hospital/health bonds because of financial problems and credit downgrades experienced by several major Pennsylvania hospitals. Outlook Because the powerful market forces that have brought the United States close to price stability -- including technology, deregulation, globalization, and vigilant central banks -- are still in full effect, we believe that inflation will remain restrained over 7 - Scudder Pennsylvania Tax Free Fund the next several years. At the same time, we believe that higher oil prices could prompt a "gentle slowdown" in U.S. economic activity. This would relieve some of the financial imbalances (vigorous individual and corporate spending contrasting with shrinking savings and profit levels, for example) that we are currently observing in the economy. Low inflation and any slowing of the economy, in turn, would benefit municipal bonds, which continue to be attractively priced versus Treasuries. At the same time, we are mindful that the U.S. economy is nearing "full employment," and that an economic rebound in Asia could cause the U.S. economy to overheat. We will therefore pursue a cautious strategy over the coming months, keeping the Fund's duration at a moderate level in an attempt to limit share price volatility. In addition to a cautious average duration, we will maintain high overall credit quality as we seek double-tax-free income and competitive returns for our shareholders. Thank you for investing with Scudder. Sincerely, Your Portfolio Management Team /s/Philip G. Condon /s/Rebecca L. Wilson Philip G. Condon Rebecca L. Wilson Scudder Pennsylvania Tax Free Fund: A Team Approach to Investing Scudder Pennsylvania Tax Free Fund is managed by a team of Scudder Kemper Investments, Inc. (the "Adviser") professionals who each play an important role in the Fund's management process. Team members work together to develop investment strategies and select securities for the Fund. They are supported by the Adviser's large staff of economists, research analysts, traders, and other investment specialists who work in our offices across the United States and abroad. We believe our team approach benefits Fund investors by bringing together many disciplines and leveraging our extensive resources. Philip G. Condon, Lead Portfolio Manager of the Fund, joined the Adviser in 1983 and has 21 years of experience in municipal investing and portfolio management. Mr. Condon has had responsibility for the Fund since 1989. Rebecca L. Wilson, Portfolio Manager, became a member of the team in 1999. Ms. Wilson, who joined the Adviser in 1986, has 13 years of experience in municipal investing. 8 - Scudder Pennsylvania Tax Free Fund Glossary of Investment Terms BOND An interest-bearing security issued by the federal, state, or local government or a corporation that obligates the issuer to pay the bondholder a specified amount of interest for a stated period -- usually a number of years -- and to repay the face amount of the bond at its maturity date. GENERAL OBLIGATION BOND A municipal bond backed by the "full faith and credit" (including the taxing and further borrowing power) of the city, state, or agency that issues the bond. A general obligation bond is repaid with the issuer's general revenue and borrowings. INFLATION An overall increase in the prices of goods and services, as happens when business and consumer spending increase relative to the supply of goods available in the marketplace -- in other words, when too much money is chasing too few goods. High inflation has a negative impact on the prices of fixed-income securities. MUNICIPAL BOND An interest-bearing debt security issued by a state or local government entity. NET ASSET VALUE (NAV) The price per share of a mutual fund based on the sum of the market value of all the securities owned by the fund divided by the number of outstanding shares. TAXABLE EQUIVALENT YIELD The level of yield a fully taxable instrument would have to provide to equal that of a tax-free municipal bond on an after-tax basis. 30-DAY SEC YIELD The standard yield reference for bond funds, based on a formula prescribed by the SEC. This annualized yield calculation reflects the 30-day average of the income earnings of every holding in a given fund's portfolio, net of expenses, assuming each is held to maturity. TOTAL RETURN The most common yardstick to measure the performance of a fund. Total return -- annualized or compound -- is based on a combination of share price changes plus income and capital gain distributions, if any, expressed as a percentage gain or loss in value. (Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and Investment Terms) 9 - Scudder Pennsylvania Tax Free Fund Investment Portfolio as of March 31, 1999 Credit Principal Rating (b) Market Amount ($) (Unaudited) Value ($) - ----------------------------------------------------------------------------------------------------------------------------- Long-Term Municipal Investments 100.0% - ----------------------------------------------------------------------------------------------------------------------------- Pennsylvania Allegheny County, PA, Airport Revenue, Pittsburgh International Airport, Series 1997 A, AMT, 5.75%, 1/1/2013 (c) ........................................ 1,500,000 AAA 1,634,204 Allegheny County, PA, Higher Education, Building Authority Revenue, Series 1993 A, 5.8%, 6/1/2013 (c) ............................................................. 2,000,000 AAA 2,154,500 Allegheny County, PA, Sanitation Authority, Sewer Revenues, Series 1986 B, Prerefunded 6/1/1999, 7.5%, 12/1/2016 (c)*** ................................... 500,000 AAA 503,610 Armstrong County, PA, St. Frances Medical Center, Series 1997 A, 6.25%, 6/1/2013 (c) ................................................................... 1,000,000 AAA 1,079,210 Berks County, PA, Municipal Authority Hospital Revenue, Reading Hospital and Medical Center Project: Series 1993, 5.5%, 10/1/2008 (c) ............................................... 1,000,000 AAA 1,087,090 Series 1993, 5.7%, 10/1/2014 (c) ............................................... 1,000,000 AAA 1,090,040 Bethlehem, PA, Water Revenue, Series 1992, Prerefunded 11/15/2001, 6.25%, 11/15/2011 (c)*** .............................................................. 1,000,000 AAA 1,066,340 Blair County, PA, Hospital Authority, Series 1998 A, 5.5%, 7/1/2011 (c) .......... 1,500,000 AAA 1,594,185 Bucks County, PA, Water and Sewer Authority Revenue, ETM, Series 1977, 6.375%, 12/1/2008** .................................................................... 425,000 SKI 470,097 Clearfield, PA, Hospital Authority Revenue, Series 1994, 6.875%, 6/1/2016 ........ 1,450,000 BBB 1,563,782 Delaware County, PA, General Obligation, Series 1999, 5.125%, 10/1/2014 .......... 2,500,000 AA 2,560,400 Delaware County, PA, White Horse Village, Series 1996 A, 6.6%, 7/1/2006 .......... 1,000,000 SKI 1,039,500 Delaware County, PA, Mercy Health Corporation of Southeastern Pennsylvania, Series 1993, Prerefunded 11/15/2005, 6%, 11/15/2007*** ......................... 1,500,000 AAA 1,650,360 Delaware County, PA, Hospital Authority Revenue, Delaware County Memorial Hospital, Series 1995, 5.5%, 8/15/2013 (c) ..................................... 1,750,000 AAA 1,837,220 Erie County, PA, Industrial Development Authority, Pollution Control Revenue, Series 1997, 5.3%, 4/1/2012 .................................................... 1,000,000 A 1,033,840 Erie County, PA, Prison Authority, Series 1991, Prerefunded 11/1/2001, 6.25%, 11/1/2011 (c)*** ............................................................... 1,000,000 AAA 1,065,460 Gettysburgh, PA, Gettysburgh College, Series 1998, 5.375%, 8/15/2013 (c) ......... 1,020,000 AAA 1,089,095 Harrisburg, PA: Series 1997 F, Zero Coupon, 3/15/2012 (c) ...................................... 1,770,000 AAA 940,596 Series 1997 D, Zero Coupon, 9/15/2011 (c) ...................................... 1,000,000 AAA 549,850 Indiana County, PA, Industrial Development Authority, Pollution Control Revenue, Series 1995, 5.35%, 11/1/2010 (c) .............................................. 1,000,000 AAA 1,075,100 Lancaster, PA, General Obligation, Series 1998 A, 5.25%, 5/1/2015 (c) ............ 1,780,000 AAA 1,833,311 The accompanying notes are an integral part of the financial statements. 10 - Scudder Pennsylvania Tax Free Fund Credit Principal Rating (b) Market Amount ($) (Unaudited) Value ($) - ------------------------------------------------------------------------------------------------------------------------------ Latrobe, PA, St. Vincent College, Series 1998, 5.375%, 5/1/2013 ................... 1,000,000 BBB 1,021,320 Lebanon County, PA, Hospital Authority Revenue, Series 1989 B, Prerefunded 11/1/1999, 8.25%, 11/1/2018*** ...................................... 600,000 AAA 628,998 Lehigh County, PA, Health Facilities Finance Authority, Series 1998 C, 5%, 7/1/2013 (c) .................................................................... 1,315,000 AAA 1,319,392 Luzerne County, PA, Flood Protection Authority, Series 1998 A, 5.25%, 1/15/2013 (c).................................................................... 1,400,000 AAA 1,448,790 Montgomery County, PA, Multi-Family Housing Revenue, Series 1993 A, 6.375%, 7/1/2012 ........................................................................ 1,500,000 SKI 1,566,060 Pennsylvania Convention Center Authority, Series 1989 A, ETM, 6%, 9/1/2019 (c)**............................................................................ 2,200,000 AAA 2,486,352 Pennsylvania General Obligation: Series 1993, 10%, 4/15/2002 ..................................................... 2,500,000 AAA 2,940,050 Series 1992, 6.25%, 7/1/2010 .................................................... 1,000,000 AA 1,152,120 Pennsylvania State Health and Educational Facilities Authority: Series 1996 A, 5.6%, 11/15/2010 (c) ............................................. 2,480,000 AAA 2,504,527 Temple University, Series 1998, 5.25%, 4/1/2013 (c) ............................. 1,525,000 AAA 1,591,078 Pennsylvania Housing Finance Agency, Single Family Mortgage Revenue: Series 1992, 6.85%, 10/1/2009 ................................................... 840,000 AA 894,617 Series 1991, 7.15%, 4/1/2015 .................................................... 865,000 AA 912,817 Pennsylvania Intergovernmental Cooperation Authority, Special Tax Revenue, City of Philadelphia, Prerefunded 6/15/2002, 6.8%, 6/15/2012*** ................. 1,000,000 AAA 1,092,510 Pennsylvania State Turnpike Commission, Series 1998 A, 5.25%, 12/1/2012 (c) ....... 4,190,000 AAA 4,400,506 Philadelphia, PA, Airport Revenue, Series 1998 A, AMT, 5.25%, 7/1/2011 ............ 2,000,000 AAA 2,080,920 Philadelphia, PA, Gas Works Revenue, Series 1998 A, 5.375%, 7/1/2012 (c) .......... 1,455,000 AAA 1,518,991 Philadelphia, PA, General Obligation: School District, Series 1995 A, 6.25%, 9/1/2009 (c) ............................. 1,000,000 AAA 1,146,010 School District, Series 1998 A, 5.25%, 4/1/2012 (c) ............................. 1,000,000 AAA 1,041,860 Series 1987 A, 11.5%, 8/1/1999 (c) .............................................. 710,000 AAA 729,120 Series 1998, 5.125%, 5/15/2012 (c) .............................................. 2,000,000 AAA 2,055,400 Series 1998, 5.25%, 3/15/2014 (c) ............................................... 1,000,000 AAA 1,033,190 Philadelphia, PA, Hospital and Higher Education Facilities Authority: Children's Seashore House, Series 1992 A, 7%, 8/15/2012 ......................... 1,000,000 A 1,086,350 Albert Einstein Medical Center, Series 1989, 7.5%, 4/1/1999 ..................... 275,000 AAA 275,000 Philadelphia, PA, Industrial Development Authority: Baptist Home of Philadelphia, Series 1998 A, 5.5%, 11/15/2018 ................... 1,000,000 SKI 950,670 Doubletree Suites, Series 1997, 6.5%, 10/1/2027 ................................. 1,000,000 SKI 1,064,140 Philadelphia, PA, Municipal Authority, Series 1993 A, 5.625%, 11/15/2014 (c) ...... 1,000,000 AAA 1,067,030 The accompanying notes are an integral part of the financial statements. 11 - Scudder Pennsylvania Tax Free Fund Credit Principal Rating (b) Market Amount ($) (Unaudited) Value ($) - ------------------------------------------------------------------------------------------------------------------------------- Philadelphia, PA, Port Authority Lease Revenue, Series 1993, 6.2%, 9/1/2013 (c)................................................................. 2,000,000 AAA 2,170,960 Philadelphia, PA, Water and Wastewater Revenue: Series 1993, 5.625%, 6/15/2008 (c) .......................................... 2,000,000 AAA 2,180,500 Series 1993, 5.625%, 6/15/2009 (c) .......................................... 2,000,000 AAA 2,185,780 Series 1995, 6.25%, 8/1/2010 (c) ............................................ 1,000,000 AAA 1,146,290 Pittsburgh, PA, General Obligation, Series 1993 A, 5.5%, 9/1/2014 (c) ......... 1,500,000 AAA 1,620,210 Pittsburgh, PA, Water and Sewer Authority Revenue, Series 1986, ETM, 7.25%, 9/1/2014 (c)** .............................................................. 150,000 AAA 183,209 Somerset County, PA, General Authority, Series 1991, Prerefunded 10/15/2001, 6.25%, 10/15/2011 (c)*** .................................................... 1,000,000 AAA 1,064,430 Southeastern, PA, Transportation Authority, Pennsylvania Special Revenue, Series 1999 B, 5.25%, 3/1/2017 (c) .......................................... 1,000,000 AAA 1,024,910 Union County, PA, Higher Education Facilities Finance Authority, Series 1992, 6.2%, 4/1/2007 (c) .......................................................... 1,000,000 AAA 1,072,840 University Area, PA, Sewer Revenue, 5.25%, 11/1/2014 .......................... 1,750,000 AAA 1,847,475 Wilson, PA, School District, General Obligation, Series 1993, Zero Coupon, ETM, 5/15/2009 (c)** ............................................................. 2,000,000 AAA 1,257,140 Yough, PA, School District, General Obligation, Series 1992, Zero Coupon, ETM, 10/1/2013 (c)** ............................................................. 1,145,000 AAA 572,328 Puerto Rico Puerto Rico Public Building Authority, Series 1995 A, 6.25%, 7/1/2013 (c) ..... 1,000,000 AAA 1,167,550 Virgin Islands Virgin Islands, Public Finance Authority, Matching Fund Loan Notes, Series A, 7.25%, 10/1/2018 ............................................................ 1,500,000 SKI 1,699,695 - ------------------------------------------------------------------------------------------------------------------------------- Total Long-Term Municipal Investments (Cost $80,164,790) 84,118,925 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Total Investment Portfolio -- 100.0% (Cost $80,164,790) (a) 84,118,925 - ------------------------------------------------------------------------------------------------------------------------------- (a) The cost for federal income tax purposes was $80,164,790. At March 31, 1999, net unrealized appreciation for all securities based on tax cost was $3,954,135. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over tax cost of $4,164,080 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value of $209,945. (b) All of the securities held have been determined to be of appropriate credit quality as required by the Fund's investment objectives. Credit ratings shown are assigned by either Standard & Poor's Ratings Group, Moody's Investors Service, Inc. or Fitch Investors Service, Inc. Securities rated by Scudder Kemper Investments (SKI) have been determined by the Adviser to be of comparable quality to rated eligible securities. (c) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC, FSA or MBIA/BIG. ** ETM: Bonds bearing the description ETM (escrowed to maturity) are collateralized by U.S. Treasury securities which are held in escrow by a trustee and used to pay principal and interest on bonds so designated. *** Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury securities which are held in escrow and are used to pay principal and interest, if any, on the tax-exempt issue and to retire the bonds in full at the earliest refunding date. AMT: Alternative Minimum Tax The accompanying notes are an integral part of the financial statements. 12 - Scudder Pennsylvania Tax Free Fund Financial Statements Statement of Assets and Liabilities as of March 31, 1999 Assets - -------------------------------------------------------------------------------- Investments, at market (identified cost $80,164,790) . $84,118,925 Cash .................................................. 364,096 Interest receivable ................................... 1,437,882 Receivable for Fund shares sold ....................... 1,737 Other assets .......................................... 1,188 ----------- Total assets .......................................... 85,923,828 Liabilities - -------------------------------------------------------------------------------- Dividends payable ..................................... 114,504 Payable for Fund shares redeemed ...................... 380,361 Accrued management fee ................................ 31,608 Other payables and accrued expenses ................... 37,983 ----------- Total liabilities ...................................... 564,456 ----------- ------------------------------------------------------------------- Net assets, at market value $85,359,372 ------------------------------------------------------------------- Net Assets - -------------------------------------------------------------------------------- Net assets consist of: Net unrealized appreciation on investments ............ 3,954,135 Accumulated net realized gain ......................... 440,623 Paid-in capital ....................................... 80,964,614 ------------------------------------------------------------------- Net assets, at market value $85,359,372 ------------------------------------------------------------------- Net Asset Value - -------------------------------------------------------------------------------- Net Asset Value, offering and redemption price per share ($85,359,372 / 6,249,841 outstanding shares of beneficial interest, $.01 par value, ---------- unlimited number of shares authorized) $13.66 ---------- The accompanying notes are an integral part of the financial statements. 13 - Scudder Pennsylvania Tax Free Fund Statement of Operations year ended March 31, 1999 Investment Income - -------------------------------------------------------------------------------- Income: Interest ....................................... $4,429,011 ----------- Expenses: Management fee ................................. 497,129 Services to shareholders ....................... 93,253 Custodian and accounting fees .................. 67,064 Trustees' fees and expenses .................... 21,788 Auditing ....................................... 30,308 Reports to shareholders ........................ 30,659 Registration fees .............................. 4,729 Legal .......................................... 7,045 Other .......................................... 7,411 ----------- Total expenses before reductions ............... 759,386 Expense reductions ............................. (241,378) ----------- Expenses, net .................................. 518,008 --------------------------------------------------------------- Net investment income 3,911,003 --------------------------------------------------------------- Realized and unrealized gain (loss) on investment transactions - -------------------------------------------------------------------------------- Net realized gain (loss) from investment transactions ................................... 1,165,200 Net unrealized appreciation (depreciation) on investments during the period .................. (1,270,955) --------------------------------------------------------------- Net gain (loss) on investment transactions (105,755) --------------------------------------------------------------- --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $3,805,248 --------------------------------------------------------------- The accompanying notes are an integral part of the financial statements. 14 - Scudder Pennsylvania Tax Free Fund Statements of Changes in Net Assets Years Ended March 31, Increase (Decrease) in Net Assets 1999 1998 - ----------------------------------------------------------------------------------------------- Operations: Net investment income gain (loss) .. $ 3,911,003 $ 3,852,004 Net realized gain (loss) from investment transactions ............ 1,165,200 588,571 Net unrealized appreciation (depreciation) on investments during the period ....................... (1,270,955) 2,760,257 ------------ ------------ Net increase (decrease) in net assets resulting from operations ... 3,805,248 7,200,832 ------------ ------------ Distributions to shareholders: From net investment income ......... (3,911,003) (3,852,004) ------------ ------------ From net realized gains from investment transactions ............ (1,139,582) (164,742) ------------ ------------ Fund share transactions: Proceeds from shares sold .......... 22,939,319 13,083,990 Net asset value of shares issued to shareholders in reinvestment of distributions ................... 3,392,442 2,523,349 Cost of shares redeemed ............ (18,422,457) (14,274,017) ------------ ------------ Net increase (decrease) in net assets from Fund share transactions 7,909,304 1,333,322 ------------ ------------ Increase (decrease) in net assets .. 6,663,967 4,517,408 Net assets at beginning of period .. 78,695,405 74,177,997 ------------ ------------ Net assets at end of period ........ $85,359,372 $78,695,405 ------------ ------------ Other Information - ----------------------------------------------------------------------------------------------- Increase (decrease) in Fund shares Shares outstanding at beginning of period ............................. 5,680,795 5,591,548 ------------ ------------ Shares sold ........................ 1,654,329 956,693 Shares issued to shareholders in reinvestment of distributions ...... 245,453 184,079 Shares redeemed .................... (1,330,736) (1,051,525) ------------ ------------ Net increase (decrease) in Fund shares ............................. 569,046 89,247 ------------ ------------ Shares outstanding at end of period 6,249,841 5,680,795 ------------ ------------ The accompanying notes are an integral part of the financial statements. 15 - Scudder Pennsylvania Tax Free Fund Financial Highlights The following table included selected data for a share outstanding throughout each period and other performance information derived from the financial statements. Years Ended March 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------- ---------------------------------------- Net asset value, beginning of period ....................... $13.85 $13.27 $13.31 $13.13 $13.01 ---------------------------------------- Income from investment operations: Net investment income ......... .65 .70 .71 .71 .73 Net realized and unrealized gain (loss) on investment transactions ................. (.00) .61 (.02) .25 .15 ---------------------------------------- Total from investment operations .65 1.31 .69 .96 .88 ---------------------------------------- Less distributions: From net investment income .... (.65) (.70) (.71) (.71) (.73) From net realized gains on investment transactions ...... (.19) (.03) (.02) (.07) (.03) ---------------------------------------- Total distributions ........... (.84) (.73) (.73) (.78) (.76) ---------------------------------------- ---------------------------------------- Net asset value, end of period $13.66 $13.85 $13.27 $13.31 $13.13 ---------------------------------------- - ------------------------------------------------------------------------- Total Return (%) (a) .......... 4.78 10.08 5.30 7.45 7.09 Ratios and Supplemental Data Net assets, end of period ($ million .................. 85 79 74 76 72 Ratio of operating expenses, net to average daily net assets (%) .63 .52 .50 .50 .50 Ratio of operating expenses before expense reductions, to average daily net assets (%) . .92 .91 .92 .91 .94 Ratio of net investment income to average daily net assets (%) 4.72 5.12 5.32 5.30 5.74 Portfolio turnover rate (%) ... 21.4 20.4 11.6 11.1 26.2 (a) Total returns would have been lower had certain expenses not been reduced. 16 - Scudder Pennsylvania Tax Free Fund Notes to Financial Statements A. Significant Accounting Policies Scudder Pennsylvania Tax Free Fund (the "Fund") is a non-diversified series of Scudder State Tax Free Trust (the "Trust"), which is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. There are currently six series in the Trust. The Fund's financial statements are prepared in accordance with generally accepted accounting principles which require the use of management estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements. Security Valuation. Portfolio debt securities purchased with remaining maturities greater than sixty days are valued by pricing agents approved by the officers of the Fund, whose quotations reflect broker/dealer-supplied valuations and electronic data processing techniques. If the pricing agents are unable to provide such quotations, the most recent bid quotation supplied by a bona fide market maker shall be used. Money market investments purchased with an original maturity of sixty days or less are valued at amortized cost. All other debt securities are valued at their fair value as determined in good faith by the Valuation Committee of the Board of Trustees. Amortization and Accretion. All premiums and original issue discounts are amortized/accreted for both tax and financial reporting purposes. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended, which are applicable to regulated investment companies and to distribute all of its taxable and tax-exempt income to its shareholders. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required. Distribution of Income and Gains. All of the net investment income of the Fund is declared as a dividend to shareholders of record as of the close of business each day and is paid to shareholders monthly. During any particular year, net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders. An additional distribution may be made to the extent necessary to avoid the payment of a four percent federal excise tax. The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from generally accepted accounting principles. As a result, net investment income and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. The Fund uses the identified cost method for determining realized gain or loss on investments for both financial and federal income tax reporting purposes. Other. Investment security transactions are accounted for on a trade date basis. Distributions of net realized gains to shareholders are recorded on the ex-dividend date. Interest income is accrued pro rata to the earlier of the call or maturity date. 17 - Scudder Pennsylvania Tax Free Fund B. Purchases and Sales of Securities For the year ended March 31, 1999, purchases and sales of long-term municipal securities aggregated $25,873,229 and $17,408,721, respectively. C. Related Parties Under the Management Agreement (the "Agreement") with Scudder Kemper Investments, Inc. ("Scudder Kemper" or the "Adviser"), the Adviser directs the investments of the Fund in accordance with its investment objectives, policies and restrictions. The Adviser determines the securities, instruments, and other contracts relating to investments to be purchased, sold or entered into by the Fund. In addition to portfolio management services, the Adviser provides certain administrative services in accordance with the Agreement. The management fee payable under the Agreement is equal to an annual rate of approximately .60% of the Fund's average daily net assets, computed and accrued daily and payable monthly. The Adviser has agreed not to impose all or a portion of its management fee and to maintain the annualized expenses of the Fund at not more than 0.50% of average daily net assets until January 31, 1998 and at not more than 0.60% of average daily net assets for the period from February 1, 1998 to January 31, 1999. Effective January 31, 1999, the Fund's expense limitation has been raised from 0.60% to 0.75%, and will remain in effect until at least July 31, 1999. For the year ended March 31, 1999, the Adviser did not impose a portion of its fee amounting to $241,378, and the portion imposed amounted to $255,751, of which $31,608 is unpaid at March 31, 1999. Effective September 7, 1998, Zurich Insurance Company ("Zurich"), majority owner of the Adviser, entered into an agreement with B.A.T Industries p.l.c. ("B.A.T") pursuant to which the financial services businesses of B.A.T were combined with Zurich's businesses to form a new global insurance and financial services company known as Zurich Financial Services. Upon consummation of the transaction, the Fund's Management Agreement with Scudder Kemper was deemed to have been assigned and, therefore, terminated. In December 1998, the Board of Trustees and the shareholders of the Fund approved a new investment management agreement with Scudder Kemper, which is substantially identical to the former Management Agreement, except for the dates of execution and termination. Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the transfer, dividend-paying and shareholder service agent for the Fund. For the year ended March 31, 1999, the amount charged to the Fund by SSC aggregated $69,003, of which $4,687 was unpaid at March 31, 1999. Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is responsible for determining the daily net asset value per share and maintaining the portfolio and general accounting records of the Fund. For the year ended March 31, 1999, the amount charged to the Fund by SFAC aggregated $36,000, of which $3,000 was unpaid at March 31, 1999. The Trust pays each Trustee not affiliated with the Adviser an annual retainer, divided equally among the series of the Trust, plus specified amounts for attended board and committee meetings. For the year ended March 31, 1999, Trustees' fees and expenses charged to the Fund aggregated $21,788. 18 - Scudder Pennsylvania Tax Free Fund D. Line of Credit The Fund and several Scudder Funds (the "Participants") share in a $850 million revolving credit facility for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee which is allocated pro rata among each of the Participants. Interest is calculated based on the market rates at the time of the borrowing. The Funds may borrow up to a maximum of 33 percent of their net assets under the agreement. E. Subsequent Event On May 3, 1999, the Board of Trustees voted to reorganize Scudder Pennsylvania Tax Free Fund's assets into Scudder Managed Municipal Bonds in a tax-free reorganization. As a result of the reorganization, each shareholder of the Fund will become a shareholder of Scudder Managed Municipal Bonds and will hold, immediately after the closing of the reorganization, that number of full and fractional shares of Scudder Managed Municipal Bonds having an aggregate net asset value equal to the aggregate net asset value of such shareholder's shares held in the Fund as of the close of business on the business day preceding the reorganization. The Board believes this action is in the best long-term interest of shareholders of Scudder Pennsylvania Tax Free Fund and has scheduled a meeting of shareholders on September 2, 1999 to consider the reorganization. In the interim, Scudder Pennsylvania Tax Free Fund remains open for new or additional investments. 19 - Scudder Pennsylvania Tax Free Fund Report of Independent Accountants To the Trustees of Scudder State Tax Free Trust and the Shareholders of Scudder Pennsylvania Tax Free Fund: In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Scudder Pennsylvania Tax Free Fund (the "Fund") at March 31, 1999, the results of its operations for the year then ended and the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 1999 by correspondence with the custodian provide a reasonable basis for the opinion expressed above. Boston, Massachusetts PricewaterhouseCoopers LLP May 19, 1999 20 - Scudder Pennsylvania Tax Free Fund Tax Information The Fund paid distributions of $.175 per share from net long-term capital gains during its year ended March 31, 1999, of which 100% represents 20% rate gains. Pursuant to Section 852 of the Internal Revenue Code, the Fund designates $1,200,000 as capital gain dividends for its year ended March 31, 1999, of which 100% represents 20% rate gains. Of the dividends paid from net investment income for the year ended March 31, 1999, 100% are designated as exempt interest dividends for federal income tax purposes. Please consult a tax adviser if you have any questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please call 1-800-SCUDDER. 21 - Scudder Pennsylvania Tax Free Fund Shareholder Meeting Results A Special Meeting of Shareholders (the "Meeting") of Scudder Pennsylvania Tax Free Fund (the "Fund") was held on December 15, 1998, at the office of Scudder Kemper Investments, Inc., Two International Place, Boston, Massachusetts 02110. At the Meeting the following matters were voted upon by the shareholders (the resulting votes for each matter are presented below). 1. To approve a new Investment Management Agreement for the Fund with Scudder Kemper Investments, Inc. Number of Votes: ---------------- For Against Abstain Broker Non-Votes* --- ------- ------- ----------------- 3,989,969 143,226 186,283 0 2. To approve the revision of the Fund's fundamental lending policy. Number of Votes: ---------------- For Against Abstain Broker Non-Votes* --- ------- ------- ----------------- 3,828,319 188,777 226,685 75,697 - -------------------------------------------------------------------------------- * Broker non-votes are proxies received by the Fund from brokers or nominees when the broker or nominee neither has received instructions from the beneficial owner or other persons entitled to vote nor has discretionary power to vote on a particular matter. 22 - Scudder Pennsylvania Tax Free Fund This Page intentionally left blank. 23 - Scudder Pennsylvania Tax Free Fund Officers and Trustees Daniel Pierce* President and Trustee Henry P. Becton, Jr. Trustee; President and General Manager, WGBH Educational Foundation Dawn-Marie Driscoll Trustee; President, Driscoll Associates; Executive Fellow, Bentley College Peter B. Freeman Trustee; Corporate Director and Trustee George M. Lovejoy, Jr. Trustee; President and Director, Fifty Associates Wesley W. Marple, Jr. Trustee; Professor of Business Administration, Northeastern University Kathryn L. Quirk* Trustee, Vice President and Assistant Secretary Jean C. Tempel Trustee; Venture Partner, Venture Capital Group Philip G. Condon* Vice President Thomas W. Joseph* Vice President Ann M. McCreary* Vice President Jeremy L. Ragus* Vice President Rebecca Wilson* Vice President John R. Hebble* Treasurer Caroline Pearson* Assistant Secretary *Scudder Kemper Investments, Inc. 24 - Scudder Pennsylvania Tax Free Fund Investment Products and Services The Scudder Family of Funds+++ - -------------------------------------------------------------------------------- Money Market - ------------ Scudder U.S. Treasury Money Fund Scudder Cash Investment Trust Scudder Money Market Series -- Prime Reserve Shares* Premium Shares* Managed Shares* Scudder Government Money Market Series -- Managed Shares* Tax Free Money Market+ - ---------------------- Scudder Tax Free Money Fund Scudder Tax Free Money Market Series -- Managed Shares* Scudder California Tax Free Money Fund** Scudder New York Tax Free Money Fund** Tax Free+ - --------- Scudder Limited Term Tax Free Fund Scudder Medium Term Tax Free Fund Scudder Managed Municipal Bonds Scudder High Yield Tax Free Fund Scudder California Tax Free Fund** Scudder Massachusetts Limited Term Tax Free Fund** Scudder Massachusetts Tax Free Fund** Scudder New York Tax Free Fund** Scudder Ohio Tax Free Fund** Scudder Pennsylvania Tax Free Fund** U.S. Income - ----------- Scudder Short Term Bond Fund Scudder GNMA Fund Scudder Income Fund Scudder Corporate Bond Fund Scudder High Yield Bond Fund Global Income - ------------- Scudder Global Bond Fund Scudder International Bond Fund Scudder Emerging Markets Income Fund Asset Allocation - ---------------- Scudder Pathway Conservative Portfolio Scudder Pathway Balanced Portfolio Scudder Pathway Growth Portfolio Scudder Pathway International Portfolio U.S. Growth and Income - ---------------------- Scudder Balanced Fund Scudder Dividend & Growth Fund Scudder Growth and Income Fund Scudder Select 500 Fund Scudder S&P 500 Index Fund Scudder Real Estate Investment Fund U.S. Growth - ----------- Value Scudder Large Company Value Fund Scudder Value Fund*** Scudder Small Company Value Fund Scudder Micro Cap Fund Growth Scudder Classic Growth Fund*** Scudder Large Company Growth Fund Scudder Select 1000 Growth Fund Scudder Development Fund Scudder 21st Century Growth Fund Global Equity - ------------- Worldwide Scudder Global Fund Scudder International Value Fund Scudder International Growth and Income Fund Scudder International Fund++ Scudder International Growth Fund Scudder Global Discovery Fund*** Scudder Emerging Markets Growth Fund Scudder Gold Fund Regional Scudder Greater Europe Growth Fund Scudder Pacific Opportunities Fund Scudder Latin America Fund The Japan Fund, Inc. Industry Sector Funds - --------------------- Choice Series Scudder Financial Services Fund Scudder Health Care Fund Scudder Technology Fund Preferred Series - ---------------- Scudder Tax Managed Growth Fund Scudder Tax Managed Small Company Fund Retirement Programs and Education Accounts - -------------------------------------------------------------------------------- Retirement Programs - ------------------- Traditional IRA Roth IRA SEP IRA Keogh Plan 401(k), 403(b) Plans Variable Annuities Scudder Horizon Plan**+++ +++ Scudder Horizon Advantage**+++ +++ +++ Education Accounts - ------------------ Education IRA UGMA/UTMA Closed-End Funds# - -------------------------------------------------------------------------------- The Argentina Fund, Inc. The Brazil Fund, Inc. The Korea Fund, Inc. Montgomery Street Income Securities, Inc. Scudder Global High Income Fund, Inc. Scudder New Asia Fund, Inc. Scudder New Europe Fund, Inc. For complete information on any of the above Scudder funds, including management fees and expenses, call or write for a free prospectus. Read it carefully before you invest or send money. +++Funds within categories are listed in order from expected least risk to most risk. Certain Scudder funds or classes thereof may not be available for purchase or exchange. +A portion of the income from the tax-free funds may be subject to federal, state, and local taxes. *A class of shares of the Fund. **Not available in all states. ***Only the Scudder Shares of the Fund are part of the Scudder Family of Funds. ++Only the International Shares of the Fund are part of the Scudder Family of Funds. +++ +++A no-load variable annuity contract provided by Charter National Life Insurance Company and its affiliate, offered by Scudder's insurance agencies, 1-800-225-2470. +++ +++ +++A no-load variable annuity contract issued by Glenbrook Life and Annuity Company and underwritten by Allstate Financial Services, Inc., sold by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange and, in some cases, on various other stock exchanges. 25 - Scudder Pennsylvania Tax Free Fund Scudder Solutions Convenient ways to invest, quickly and reliably: - ------------------------------------------------------------------------------------------------------------------------------ Automatic Investment Plan QuickBuy A convenient investment program in which money is Lets you purchase Scudder fund shares electronically debited from your bank account monthly to electronically, avoiding potential mailing delays; regularly purchase fund shares and "dollar cost average" money for each of your transactions is -- buy more shares when the fund's price is lower and electronically debited from a previously designated bank fewer when it's higher, which can reduce your average account. purchase price over time.* Automatic Dividend Transfer Payroll Deduction and Direct Deposit The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at fund to purchase shares in another, automatically one time. (accounts with identical registrations or the same social security or tax identification number). * Dollar cost averaging involves continuous investment in securities regardless of price fluctuations and does not assure a profit or protect against loss in declining markets. Investors should consider their ability to continue such a plan through periods of low price levels. Around-the-clock electronic account service and information, including some transactions: - ------------------------------------------------------------------------------------------------------------------------------ Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- www.scudder.com 1-800-343-2890 Personal Investment Organizer: Offering Personalized account information, the ability to account information and transactions, interactive exchange or redeem shares, and information on other worksheets, prospectuses and applications for all Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation, whenever you need them. Scudder's Site also provides news about Scudder funds, retirement planning information, and more. Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient, timely, and reliable automated withdrawal programs: - ------------------------------------------------------------------------------------------------------------------------------ Automatic Withdrawal Plan QuickSell You designate the bank account, determine the schedule Provides speedy access to your money by (as frequently as once a month) and amount of the electronically crediting your redemption proceeds redemptions, and Scudder does the rest. to the bank account you previously designated. Distributions Direct Automatically deposits your fund distributions into the bank account you designate within three business days after each distribution is paid. For more information about these services, call a Scudder representative at 1-800-225-5163 - ------------------------------------------------------------------------------------------------------------------------------ 26 - Scudder Pennsylvania Tax Free Fund Mutual Funds and More -- Brokerage and Guidance Services: - ------------------------------------------------------------------------------------------------------------------------------ Scudder Brokerage Services Scudder Portfolio Builder Offers you access to a world of investments, A free service designed to help suggest ways investors like including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global, over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds, fund companies. And Scudder Fund Folio(SM) provides using Scudder funds. investors with access to a marketplace of more than 800 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM) transaction fees or commissions. Scudder shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load Brokerage account already reserved for them, with funds but want ongoing professional assistance in no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for individuals investing $100,000 or more. Fund Folio funds held less than six months will be charged a transaction fee. You can buy shares directly from the fund itself or its principal underwriter or distributor without paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061. Member SIPC. Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a program offered by Scudder Investor Services, Inc., Adviser. For more information about these services, call a Scudder representative at 1-800-225-5163 - ------------------------------------------------------------------------------------------------------------------------------ Additional Information on How to Contact Scudder: - ------------------------------------------------------------------------------------------------------------------------------ For existing account services and transactions Please address all written correspondence to Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds P.O. Box 2291 For establishing 401(k) and 403(b) plans Boston, Massachusetts Scudder Defined Contribution Services -- 02107-2291 1-800-323-6105 Or Stop by a Scudder Investor Center For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near answers to investment questions you -- they can be found in the following cities: Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco Investor.Relations@scudder.com Boston New York 27 - Scudder Pennsylvania Tax Free Fund About the Fund's Adviser Scudder Kemper Investments, Inc., is one of the largest and most experienced investment management oganizations worldwide, managing more than $280 billion in assets globally for mutual fund investors, retirement and pension plans, institutional and corporate clients, insurance companies, and private family and individual accounts. Scudder Kemper Investments has a rich heritage of innovation, integrity, and client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 80 years ago as one of the nation's first investment counsel organizations, joined the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich Kemper Investments, Inc., with 50 years of mutual fund and investment management experience, was combined with Scudder. Headquartered in New York, Scudder Kemper Investments offers a full range of investment counsel and asset management capabilities, based on a combination of proprietary research and disciplined, long-term investment strategies. With its global investment resources and perspective, the firm seeks opportunities in markets throughout the world to meet the needs of investors. Scudder Kemper Investments, Inc., the global asset management firm, is a member of the Zurich Financial Services Group. The Zurich Financial Services Group is an internationally recognized leader in financial services, including property/casualty and life insurance, reinsurance, and asset management. This information must be preceded or accompanied by a current prospectus. Portfolio changes should not be considered recommendations for action by individual investors. SCUDDER [LOGO]